Wealth Tip: The Two Keys to Investing Intelligently in the Current Real Estate Market
Key One: Remember Fundamentals
Now that in most areas of the country the market has shifted, fundamentals matter more than ever.
If you are buying for the short term (i.e. to immediately resell either by flipping the deal to another investor wholesale or selling it to a retail buyer) then you need to be buying cheaply enough so that when you factor in holding costs, closing costs, repairs, etc. that you will still conservatively make a profit.
If you are buying for the long term make sure the property can afford to pay for itself. CASH FLOW is king! I’ve watched to many would be investors forget this and take marginal deals with little equity and even less cash flow just because a motivated seller was willing to deed it to them. In a tightening real estate market sellers will be willing to walk from the house, but this doesn’t mean that you should take it. If you plan to keep the property then it must cash flow with a cushion (or at the very least have some other plus in the deal to make it worthwhile to do, like very low price you’re buying at.)
I was talking with my friend Stephen, he was actually featured in Diane and my newest book, The Maui Millionaires. He has three real estate businesses: a development company, a rental property business, and an “Ugly Houses” franchise. He shared with me that in his local market he has to be very picky about which deals he’s even going to take. If he’s buying for cash he wants to make sure he really is buying cheap enough (he goes for 50-60 cents on the dollar, but the max you should ever pay is 70% of the as is value.) If he’s buying on terms (like a subject to deal or a lease option deal) he needs to have the property cash flow well or he’s not interested. He’s a smart investor and I think you would do well to heed his advice.
Two: Use Debt Wisely
There are so many loan programs available for investors now—conventional fixed rate, interest only, negative amortization, ARM’s, option ARM’s, etc. The key is to use any financing intelligently.
This means making sure you choose financing that truly fits your long terms goals.
For example, if you are buying a house to fix and flip, then a short term hard money loan might very well be appropriate. But I recently saw an investor who intended to turn her property fast but got stuck with the home for over six months on the resale market. The high interest rate “short term” loan she got from a local hard money lender at 12% (plus 5 points up front) turned out to be a very expensive loan to use to hold the property that she wasn’t having much luck selling. In this case the bottom line was that she paid too much for the property considering all the repairs she needed to do, and got into trouble on the back end.
Another example is an investor who refinanced out a lot of his equity with an option ARM (a loan where you as the borrower can choose three different payment options—1. To make the full PITI payment. 2. To make an interest only payment. 3. To make a negative amortizing “minimum payment” where you loan balance grows.)
After several years of great cashflow he enjoyed from making the minimum payment the lender ended up recasting the loan because according to the terms of the loan, if the total loan balance grows by a certain amount the lender can redo the whole loan and the borrower MUST pay the full PITI payment. As you can imagine the borrower in this situation went from a positive cashflow to a big negative cashflow. And with the dip in the real estate market refinancing his way out wasn’t so easy.
The bottom line is for you to make sure your financing is appropriate to your intended plans, plus that you have a built in margin of safety in your deals.
**********************************
I hope you enjoyed the wealth and investor tips this week.
Here's wishing you a great 2007!
My very best to you,
David
P.S. Just a quick reminder that on January 20-21-22-23rd Diane and I are holding two back to back 2 day wealth workshops. The first is the “Mini-Maui” wealth weekend, and the second is the “Financial Fluency” workshop. For complete details just click here!
Now that in most areas of the country the market has shifted, fundamentals matter more than ever.
If you are buying for the short term (i.e. to immediately resell either by flipping the deal to another investor wholesale or selling it to a retail buyer) then you need to be buying cheaply enough so that when you factor in holding costs, closing costs, repairs, etc. that you will still conservatively make a profit.
If you are buying for the long term make sure the property can afford to pay for itself. CASH FLOW is king! I’ve watched to many would be investors forget this and take marginal deals with little equity and even less cash flow just because a motivated seller was willing to deed it to them. In a tightening real estate market sellers will be willing to walk from the house, but this doesn’t mean that you should take it. If you plan to keep the property then it must cash flow with a cushion (or at the very least have some other plus in the deal to make it worthwhile to do, like very low price you’re buying at.)
I was talking with my friend Stephen, he was actually featured in Diane and my newest book, The Maui Millionaires. He has three real estate businesses: a development company, a rental property business, and an “Ugly Houses” franchise. He shared with me that in his local market he has to be very picky about which deals he’s even going to take. If he’s buying for cash he wants to make sure he really is buying cheap enough (he goes for 50-60 cents on the dollar, but the max you should ever pay is 70% of the as is value.) If he’s buying on terms (like a subject to deal or a lease option deal) he needs to have the property cash flow well or he’s not interested. He’s a smart investor and I think you would do well to heed his advice.
Two: Use Debt Wisely
There are so many loan programs available for investors now—conventional fixed rate, interest only, negative amortization, ARM’s, option ARM’s, etc. The key is to use any financing intelligently.
This means making sure you choose financing that truly fits your long terms goals.
For example, if you are buying a house to fix and flip, then a short term hard money loan might very well be appropriate. But I recently saw an investor who intended to turn her property fast but got stuck with the home for over six months on the resale market. The high interest rate “short term” loan she got from a local hard money lender at 12% (plus 5 points up front) turned out to be a very expensive loan to use to hold the property that she wasn’t having much luck selling. In this case the bottom line was that she paid too much for the property considering all the repairs she needed to do, and got into trouble on the back end.
Another example is an investor who refinanced out a lot of his equity with an option ARM (a loan where you as the borrower can choose three different payment options—1. To make the full PITI payment. 2. To make an interest only payment. 3. To make a negative amortizing “minimum payment” where you loan balance grows.)
After several years of great cashflow he enjoyed from making the minimum payment the lender ended up recasting the loan because according to the terms of the loan, if the total loan balance grows by a certain amount the lender can redo the whole loan and the borrower MUST pay the full PITI payment. As you can imagine the borrower in this situation went from a positive cashflow to a big negative cashflow. And with the dip in the real estate market refinancing his way out wasn’t so easy.
The bottom line is for you to make sure your financing is appropriate to your intended plans, plus that you have a built in margin of safety in your deals.
**********************************
I hope you enjoyed the wealth and investor tips this week.
Here's wishing you a great 2007!
My very best to you,
David
P.S. Just a quick reminder that on January 20-21-22-23rd Diane and I are holding two back to back 2 day wealth workshops. The first is the “Mini-Maui” wealth weekend, and the second is the “Financial Fluency” workshop. For complete details just click here!
posted by David Finkel at 2:18 PM
1 Comments:
David,
I love your books and highly recommend you to all new investors. Keep up the great work and all the inspiration.
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